Tag: finance

“Central bankers may have their hearts in the right place, but no matter how much more they do, they end up with more debt and no progress,” rages CNBC’s Santelli which, as Vine Street’s Yra Harris notes, “is enabled by a potemkin village of counterfactuals,” before embarking on the most vitriolic take-down of the “atavistic remnant of a colonial past” – The IMF. Simply put, as Santelli exclaims, “the world has really lost its way,” and  Harris is in full agreement, concluding with a simple message to the world’s central banks – “Stop!”

Put down any sharp objects and ensure there is no fluid in your mouth as Yra and Rick unleash 210 seconds of uncomfortable fact-bombs on the American public… (as Santelli laments “I never saw anyone’s veins pop like that before.”

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By EconMatters

Citi Research fails to address the Fundamentals side of the equation, the Doha Meeting is Meaningless in the overall scope of the Oil Market.

Pay Attention to the declines in U.S. Production over the next 4 Months. Along with the drop in Rig Counts which are at record lows, and the lag effect between the drop in Rig Counts and U.S. Production Declines.

The Decline in Gasoline Stocks is reflective of the Strong Demand for Gasoline given these low prices relative to the last 10 years of historical prices. Compare Gasoline demand with this time last year, and demand is only going to strengthen into the heart of the Summer Driving Season.

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Submitted by Eugen von Bohm-Bawerk via Bawerk.net,

In the latest semi-annual Keynesian incantation spewed out by the world’s best pseudo-scientists, we learn that growth has been too slow for too long and that in itself is the cause of slow growth.

First, they promote debt-funded consumption because spending – money supply/credit and velocity – is equivalent to nominal GDP growth, and as long as you have nominal GDP growth you can always add more debt to the existing stock ad infinitum. That obviously came crashing down in 2008. At that important juncture, which proved to even the most ingrained and indoctrinated Krugmanite that something was seriously wrong with the economic model a proper re-set would be the only route toward sustainable prosperity. Instead of taking the honest path, countercyclical policy measures, both fiscal and monetary, aimed at maintaining and even expanding debt on top of the bloated and highly unsustainable level that existed at the 2008 inflection point.

As parasitical, id est consumptive, debt got thrown a lifeline by the global central bankers with the explicit condonation by the like of the IMF, it is no wonder growth has been weak or even absent in the aftermath of reaching debt saturation. Old structures have been cemented and new capital formation mal-invested.

Specifically from the latest IMF report on the global economy, we learn that “…persistent slow growth has scarring effects that themselves reduce potential output and with it, consumption and investment…” circulus in probando!

IMF now expect world growth to be 3.2 per cent in 2016, down from 3.6 per cent by their October outlook.

The most recent US projection tells you everything you need to know about the credibility of IMF, or dare we say mainstream, forecasting. While the IMF slashed the expected growth for 2016 by more than 40 basis points compared to their October release, to 2.4 per cent they will still be way off even upon release of the report. The US economy probably did not grow at all in the first quarter and as we will show in an upcoming report, the US economy is already in, or at the very least heading straight into a recession.

Why so optimistic? There are two reasons.

First, being taught from the scriptures of Keynes they believe the business cycle is solely driven by animal spirits and if they can somehow change people’s perception of the world by providing a rosy outlook the world will automatically become better. Magic. We call it Goebbelnomics.

 

The second reason is less insincere and more technical. In the New Testament of the scripture, originally written by Ragnar Frisch it is postulated that all economic processes can be mathematically deduced in a complex web of equations, commonly known as an econometric model. An economic model is nothing more than an extrapolation of historical data and does not tell us anything worth knowing, such as upcoming structural shifts and unsustainable economic processes.

We looked at the rate of growth in Japan since 1980 and all IMFs forecast for Japan since 1990 and plotted them. The result is unsurprising, but striking nonetheless.

Japan, opting for monetary stimulus to restructure their economy away from exports toward domestic consumption on back of a forced dollar deprecation emanating from the Louvre Accord (sounds familiar?) crashed in 1990. It was a structural shift, but IMF's models looked to recent history and consistently projected rapid growth. It was not until the mid-2000s, nearly 15 years after the fact that models got enough low-growth data into their sample to adjust forecasts accordingly. Ironically, that was just in time for another structural shift hitting the Japanese economy, which was obviously also completely missed by models guided by rear-view mirror. Just as a wave hitting the shoreline, economic forecast rises rapidly while only gradually abating toward the new reality.

Any honest person working with such models know their gross limitations and how awful their track-records are. Still, these are the tools guiding the world’s central planners when they micromanage economies, be it fiscal or monetary expansion.

They are obviously completely clueless, but still act with an extravagant level of hubris simply because they believe the scripture and their models.

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In January we pointed out "the last bubble standing," as China's crashing equity market had spurred massive inflows – directed by a "well-meaning" central-planning committee's propaganda – sparking a massive bubble in Chinese corporate bond markets (in an effort to enable desperately weak balance-sheet firms to roll/refi their debt and keep the zombies alive). That has now ended as China's junk bond risk has soared to 5-month highs with its worst selloff since 2014. As HFT warns, "we should avoid junk bonds."

China’s high-yield bonds are in the midst of their worst two-month selloff since the end of 2014 and investors say they have yet to fully price in the risk of defaults as the economy slows. The gap reached a four-month high of 379 basis points, from as low as 352 on Jan. 19, as at least seven companies reneged on bond obligations this year, up from one in the same period of 2015.

As Bloomberg details,

“Most high-yield bonds haven’t fully priced in default risks,” said Zhao Hengyi, Shanghai-based deputy director of the bond fund department at HFT Investment Management Co., which oversees 46.9 billion yuan ($7.2 billion) of assets. “We should avoid junk bonds.”

 

Premier Li Keqiang has pledged to pull support from zombie firms that have wasted financial resources and dragged on economic growth, which is slowed to 6.7 percent in the first quarter. Chinese companies must repay a total of 31.3 billion yuan of bonds rated AA- or lower this year, the most on record, according to Bloomberg data based on rankings from the nation’s four-biggest rating firms. Corporate notes rated AA- or lower are considered as junk bonds in China.

 

China’s corporate debt burden is heavy, but if you have a lot of savings and lending, the leverage compared with countries without high saving rates is not very high, People’s Bank of China Governor Zhou Xiaochuan told a briefing in Washington on Thursday. The PBOC has lowered benchmark interest rates six times since 2014, driving a record rally in the bond market and underpinning a jump in debt to 247 percent of gross domestic product.

 

At least 37 Chinese firms postponed or scrapped 35.2 billion yuan of planned note sales through April 13, compared with nine companies pulling 12.4 billion yuan a year ago, data compiled by Bloomberg show. About half of the cancellations took place this week after state-owned China Railway Materials Co. halted its bond trading Monday.

 

“The recent default events have hurt investors,” said Xu Gao, chief economist at Everbright Securities Co. in Beijing. “So it’s natural for bond yield spreads to go up.”

As BofA warns however, there are signs that the risk-free rate in China may have bottomed and that the credit spread is widening.

This may check any enthusiasm in the market, in our view. We consider the latest rally to be tactical and we don’t recommend that investors chase it. We maintain our year-end target for HSCEI of 9,000 and, for SHCOMP, 2,600.

 

Chart 1 shows the 5-year Chinese Government Bond (CGB) yield vs. CSI300. At the risk of oversimplifying, we separate the market’s behaviors into two phases: before mid-2013, Phase I; post mid-2013, Phase II. We judge that market confidence in fundamentals, i.e., the earnings outlook, was generally strong in Phase I; but weak in Phase II.

 

 

In Phase I, the bond yield generally correlated positively with CSI300’s performance. When the yield rose, investors, in general, believed that the economy was strong enough to endure some tightening. As a result, they were willing to continue to bid for stocks for a while.

 

On the other hand, in Phase II, investors were much less confident: when the yield rose, the market almost immediately came under pressure; when the yield fell, the rebound was mostly muted (except the artificial rally from mid-2014 to mid-2015, underpinned by perceived implicit government guarantees) and often with a significant lag. Actually, since mid-2015, despite the sharp drop in rates, A-shares have continued to be under pressure.

 

Now, interest rates appear to be experiencing upward pressure. If they indeed move up noticeably, we would expect market sentiment to weaken fairly quickly.

 

The key question for us is, if interest rates indeed rise noticeably, will the market resort to the Phase I thinking, i.e., believing that the growth is strong enough to handle the rise? While we cannot rule out the possibility, we believe that this is unlikely, given the tentative stabilization of macro conditions and the continued surge in debt.

We leave it to Xia Le to conclude,

"The equity rout merely reflects worries about China’s economy, while a bond market crash would mean the worries have become a reality as corporate debts go unpaid," said Xia Le, the chief economist for Asia at Banco Bilbao. "A Chinese credit collapse would also likely spark a more significant selloff in emerging-market assets."

 

"Global investors are looking for signs of a collapse in China, which itself could increase the chances of a crash… This game can’t go on forever."

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Submitted by Mike Krieger via Liberty Blitzkrieg blog,

Asher Edelman just penned a powerful endorsement of Bernie Sanders in the The Guardian titled, I’m the real-life Gordon Gekko and I support Bernie Sanders.

So who is Asher Edelman? According to the paper:

Asher Edelman is an art collector and financier. He worked on Wall Street from 1962 to 1988 and taught a course at Columbia University School of Business titled Corporate Raiding: The Art of War. He is one of the inspirations for the Gordon Gekko character in the film Wall Street. 

Now here’s some of what he wrote regarding the state of the U.S. economy and the 2016 presidential election:

Banking is the least understood, and possibly most lethal, of all the myriad issues at stake in this election. No candidate other than Bernie Sanders is capable of taking the steps necessary to protect the American people from a repeat of the recent debacle that plunged the nation into a recession from which we have not recovered.

 

The potential for a depression looms heavily on the horizon. As a trained economist who has spent more than 20 years on Wall Street – and one of the models for Gordon Gekko’s character – I know the financial system is in urgent need of regulation and responsibility. Yet Hillary Clinton is beholden to the banks for their largesse in funding her campaign and lining her pockets. The likelihood of any Republican candidate taking on this key issue is not even worthy of discussion.

 

The recession of 2007-2016, and the persistent transfer of wealth from the 80% to the 1% is, mostly the result of banking irresponsibility precipitated by the repeal of the Glass-Steagall Act in 1999. The law separated commercial banking (responsible for gathering and conservatively lending out funds) from investment banking (more speculative activities).  

 

Remarkably, today the derivatives positions held by the large banks approach 10 times those of 2007-2008. In four banks alone, they exceed the GDP of the entire world. This is the interesting consequence when unchecked risk management rests in bankers’ hands.

 

Wait, there’s more. After the collapse of 2008, the Federal Reserve invested more than $15tn to save the banks under the guise of monetary stimulation. At the same time, little or no funds were channeled to the needs of the American people. Yet today we face another crisis of liquidity. This time Europe will break first, followed by their highly leveraged US colleagues. Meanwhile, the bottom 80% of Americans remain mired in a recession, having seen no increase in their incomes during the last 20 years.

 

Poverty is at its highest level since the 1930s (in some areas of the country, higher). More than 30% of all children live with families subsisting below the poverty level. Employment is at a new all-time low (the percentage of employed persons is at about 49%, having been at more than 52% prior to 2008).

 

Dodd-Frank provides the necessary structure with which to begin. Enforce it. Put teeth into bank regulation. Determine the acceptable level of risk at which banks can operate. Make management, not underlings or stockholders, responsible for violating the law. Encourage the Justice Department to be clear in seeking appropriate penalties for financial crimes in large institutions, not by fines alone but by the prosecution of those executives responsible.

 

Split up the banks that are speculating with depositor and government funds. Investment banks are supposed to risk investors’ money but commercial banks should return to lending fairly and carefully to help create a foundation for future growth. Bernie Sanders is the only independent candidate who escapes the malaise of being bought. He is paid for by the people and represents their interests. And you can take that to the bank.

Despite my reservations regarding Senator Sanders on certain issues, one thing is perfectly clear. He’s the only one running who genuinely wants to reign in the out of control financial services sector, and the only one who will aggressively prosecute bank executives. To me, this isn’t a side issue, and I agree with Mr. Edelson when he says:

Banking is the least understood, and possibly most lethal, of all the myriad issues at stake in this election.

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For many months we have covered the “world’s most bearish hedge fund“, Horseman Global, which over the past several months (and years) has had a stunning run and has generated unprecedented returns (even as it has maintained a net short exposure for the past 4 years) and just last month, after returning 9.6% YTD went record short with a -88% net exposure. That decision appears to have proven unfortunate, if only for now, because as Russell Clark, CIO, reports in the latest letter, “your fund fell 9.62% in March.” As a result of the monthly drop, all of Horseman’s YTD gains were wiped out.

To find another month in which the fund had such a bad performance once has to go back all the way to September and November 2011, the month when the Fed engaged in a coordinated global bailout, when it launched expanded swap lines with all central banks and especially Europe, as Greece and the Eurozone were both on the precipice. The result was a surge higher in stocks which crushed the performance of the traditionally bearish hedge fund.

So has the recent drubbing discouraged Russell Clark? Au contraire: as the following table of the fund’s gross and net exposure shows, instead of reducing his bearish bets, Clarke is adding even more shorts, and as of the end of March he has taken his net short exposure from -88% to an unprecedented, and record -98%!

Insanity? Perhaps. This is how Clark explains his reasoning.

* * *

It has been a very interesting year for active fund managers. As one client put it, most funds got crushed by their long positions in January and February and then in March the short positions destroyed the funds. The Horseman Global is obviously very short, and hence March was a poor month for us.

 

The first thing to note, and to repeat from last month’s newsletter, is that short squeezes and bear market rallies are part and parcel of running a fund that is net short. And I learnt a long time ago, things that cannot be avoided, should then be welcomed. I am sure some of you are asking how a nearly 10% drawdown can be welcomed? Well if we look at the first quarter, we find that commodities and commodity currencies had a large rally. Furthermore markets like Brazil are up 30% this year. The S&P, despite being down 12% at one point, has rallied to be up to 1% for the year. Despite such moves, we are only down 1% for the year.

 

A lot of this relatively strong performance came through the use of non-consensus trades such as long yen, Japanese Government Bonds and treasuries. This has meant that we have not been forced to cover our short book, and in fact remain record short. Many other funds have been forced to cover short positions, and are now less net short at much higher prices than six or seven weeks ago. The nature of short selling is that shorts reduce in size when working, encouraging us to add more when they have already fallen, and grow in size when rallying encouraging us to cover. But of course to follow such a strategy would be to flush capital down the toilet. If you wish to be short to make money (rather than to just hedge), then you need to tolerate big moves in the net short position.

 

For that reason, I have operated a very open policy on what I short. The reason for this is that investors that have been paying attention, should realise March would have been a poor month, but at the same time, if they share my views, should also view drawdowns as opportunities to add, which has indeed happened. This is one reason I welcome short squeezes.

 

The other reason that I like short squeezes, is that the best time to short is when other investors have suffered so much psychological damage from being short, they have promised themselves to never short again. Judging from the performance of funds with similar short positions to Horseman Global and short covering flow numbers that I have seen, March has seen many funds cover extensively. I find this very encouraging for future returns to the short book.

 

However, I can hear you say, how do you know this is just a short squeeze, and not the beginning of something much more substantial? While equities are trying to send a bullish tune, the 200 day moving average is now trending down for S&P, Dax and the Nikkei. This is not bullish. Furthermore, yield curves in the US, Japan and Europe have flattened. This is not bullish. Yen is rallying. This is not bullish. We have seen substantial covering by the market. This is not bullish.

 

To my mind, if you want to be short, this looks about as good as it gets.

 

Your fund is short equities and long bonds.

At least the man has conviction.

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Don’t expect any optimistic emails from Tim Cook to Jim Cramer for a long time, because according to a just released report in Japan‘s Nikkei, Apple will continue its reduced production of iPhones in the April-June period in light of sluggish sales, according to parts suppliers notified of the plan.

The website reports that slow sales of the flagship iPhone 6s and iPhone 6s Plus, which debuted last autumn, have forced Apple to adjust inventories. It lowered production for the January-March quarter by about 30% from the year-earlier period. With sales still sluggish, the U.S. company has told parts suppliers in Japan and elsewhere that it will maintain the reduced output level in the current quarter.

Apple apparently does not plan to produce a large enough volume of the small iPhone SE released last month to offset the slump of its flagship series. However, should Apple decide to release its next flagship model earlier than the usual September launch, parts production for that smartphone could take off around late May.

A prolonged production cut would hurt Japanese parts suppliers such as liquid crystal display panel manufacturers Japan Display and Sharp, memory chip supplier Toshiba and Sony, which provides image sensors for cameras. With their plants already operating at reduced rates, they may be forced to downgrade their earnings forecasts for the April-June quarter.

The current production cut could last longer than the one Apple implemented in 2013. Some 1.5 billion smartphones are shipped globally in a year, but the market’s growth is slowing.

Investors are unhappy at the news.

Time for some more buybacks?

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With all eyes on Doha this weekend, today's rig count data may have even less signaling power than normal. The US oil rig count has risen for only one week this entire year and continues to track lagged crude prices lower, dropping 3 to 351 (lowest since Oct 09). With gas rigs unchanged, the total rig count dropped once again to a new fresh record low at 440. The reaction in crude oil prices was a small bounce.

• *U.S. GAS RIG COUNT UNCHANGED AT 89 , BAKER HUGHES SAYS

The US oil rig count is tracking lagged crude prices perfectly still…

• *U.S. OIL RIG COUNT DOWN 3 TO 351 , BAKER HUGHES SAYS

Will rig counts rise again shortly?

Charts: Bloomberg

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A new fox poll was released yesterday, and it shows Donald Trump jumping out to a commanding 18 point lead over Ted Cruz in the Republican race for the nomination. As Fox News notes, Trump’s best numbers are coming from voters without a college degree (54%), and who describe themselves as “very conservative (50%).

This is a significant boost to the Trump campaign, as just last month he only held a 3 point lead on Cruz.

Trump is also beating out Cruz by a wide margin among voters when asked which Republican has the best chance to beat Hillary, should she win the Democratic nomination.

On the other side of things, the race for the Democratic nomination has significantly tightened. Yesterday’s poll showed Hillary Clinton holding a slight 2 point advantage over Bernie Sanders, who has a full head of steam heading into the New York primary. According to Fox, Clinton’s support has declined 11 points among women, while support for Sanders is up by 9.

The tide seems to be shifting in the Democratic race, and all eyes will be turned to New York next week as Sanders tries to ride this momentum and somehow achieve the once unthinkable – winning Hillary’s “home state.”

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